HESS v. REG-ELLEN MACHINE

United States District Court, N.D. Illinois

August 11, 2004.

Hess
v.
Reg-Ellen Machine.

The opinion of the court was delivered by: PHILIP REINHARD, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs, John Hess and James Hess, filed separate actions
against defendant, the Reg-Ellen Machine Tool Corporation
Employee Stock Ownership Plan, under the Employee Retirement
Income Security Act of 1974 (ERISA), claiming that the decision
of the administrative committee that interpreted the retirement
plan so as not to allow them to transfer assets from the employer
stock fund to the trustee's investment fund was arbitrary and
capricious. Both plaintiffs have also asserted claims under the
Illinois Business Corporation Act (Act) and under an estoppel
theory. Both plaintiffs and defendant have filed motions for
summary judgment. Each side has also filed motions to strike
certain evidence submitted by the other, and plaintiffs have
filed two motions for sanctions pursuant to Fed.R. Civ. P. 11
related to defendant's motion to strike.

Where an ERISA plan gives the plan administrator the discretion
to interpret the plan terms (as it is undisputed it does here), a
reviewing court applies an arbitrary and capricious standard.
Dabertin v. HCR Manor Care, Inc., 373 F. 3d 822, 827 (7th
Cir. 2002). This standard gives great deference to the decision
of the committee, and that decision cannot be overturned unless
it is "downright unreasonable." Dabertin, 373 F. 3d at 828.
Nonetheless, the committee must articulate a rational connection
between the facts found, the issue to be decided, and the choice
made. Dabertin, 373 F. 3d at 828. To have its decision
overturned, the committee's interpretation of the plan must defy
all common sense. Dabertin, 373 F. 3d at 828. In evaluating a
plan administrator's decision under this standard, the court
should consider only the evidence that was before the
administrator when it made its decision. Hess v. Hatford Life &
Accident Insurance Co., 274 F. 3d 456, 462 (7th Cir. 2001).

If a conflict of interest exists, the standard of review
remains the same. O'Reilly v. Hartford Life & Accident Insurance
Co, 272 F. 3d 955, 960 (7th Cir. 2001). It is, instead, a
factor to consider, and in the absence of specific bias, a court
shall not presume that there is significant bias. O'Reilly,
272 F. 3d at 960.

In this case, plaintiffs' asserted interpretation of the plan
is that following the 1994 amendment which eliminated employee
contributions they either retained or obtained the power under
the plan to transfer assets from the employer stock fund to the
trustee's investment fund. The committee interpreted the plan as
not to allow such a transfer notwithstanding the amendatory
language of section 4.12(i). The committee reached its conclusion
based on a consideration of the plan language only. Plaintiffs
did not submit any other evidence to the committee in support of
their interpretation.

Initially, the court rules there was nothing arbitrary and
capricious about the committee relying on the language of the
plan alone. While plaintiffs complain that the committee did not
consider evidence from David Lewellyn, the defendant's former
president and purported author of section 4.12(i), and did not
seek advice from its former plan advisors, it was incumbent upon
plaintiffs as the ones seeking a favorable interpretation of the
plan to have submitted such evidence to the committee, or at the
very least, presented arguments to the committee based on such
evidence. Plaintiffs failed to do so, however, and cannot now
rely on their own failure to create an issue of arbitrariness and
capriciousness. Nor have plaintiffs shown that they were
prevented from presenting such evidence.

When the court reviews the pertinent language of the plan, it
cannot say that the committee's conclusion that plaintiffs lacked
the authority to transfer assets from the employer stock fund to
the trustee's investment fund was a downright unreasonable
interpretation. There is no doubt that according to the terms of
the plan prior to the amendment that plaintiffs had the authority
to direct their initial contributions into either the employer
stock fund or the trustee's investment fund. It is not so clear,
however, whether they could later transfer assets between those
funds. What is clear is that it was not downright unreasonable
for the committee to have concluded that plaintiffs did not have
the authority to do so prior to the amendment.

The key issue then is whether the amendment in section 4.12(i)
continued (or created) an authority to do so such that the
committee's conclusion that it did not was arbitrary and
capricious. Section 4.12(i) states that although the participants
shall "continue to have the right to direct investments of the
Participants Account as to contributions made on or before" the
date of the amendment, they have no such right to direct
investments made after the date of the amendment. Clearly, the
use of the word "continue" implies that plaintiffs' retained
whatever right to transfer assets that pre-existed section
4.12(i). Based on the plain language of the plan, that right was
limited to directing initial contributions as between the two
funds and to directing investments within the trustee's
investment fund. Of course, after the amendment, the first option
was no longer available. Thus, after the amendment, plaintiffs
continued to have the right to direct investments within the
trustee's investment fund. At least that is what the committee
concluded, which this court finds to be a completely reasonable
interpretation. It is also one that comports with common sense as
there were investment options that existed within the investment
fund that survived the 1994 amendment. The right to exercise
those options were unaffected by the elimination of employee
contributions.

The fact that plaintiffs have suggested an alternative
interpretation that is at least arguably plausible does not
render the committee's conclusion arbitrary and capricious. So
long as the committee's interpretation of the plan language is
defensible, it is insulated from attack at this point.

Nor is the court persuaded by plaintiffs' contention of a
conflict of interest. The mere fact that company officers were
involved in interpreting the plan does not, without more,
demonstrate a conflict of interest. Vague assertions of ill-will
between some company officers and Lewellyn does not show a
conflict either.

As for plaintiffs' estoppel argument based on oral assertions
by Lewellyn regarding the import of section 4.12(i), that claim,
like so much of plaintiffs' evidence, was never presented to the
committee and cannot be considered now. Further, it is doubtful
that such an oral assertion can be the basis for an estoppel
claim related to an ERISA plan. See Kamler v. H/N
Telecommunication Services, Inc., 305 F. 3d 672, 678 (7th
Cir. 2002). Lastly, such a claim is meritless here where the
reliance placed in an opinion of what section 4.12(i) meant would
not constitute reasonable reliance in the face of the apparent
disagreements with that opinion as expressed by defendant's
representatives in response to plaintiffs' inquiries. See
Kamler, 305 F. 3d at 678.

As for the claim under the Illinois Act, the court grants
summary judgment in favor of defendant as the undisputed evidence
shows that plaintiffs were not shareholders and, therefore, not
entitled to examine the books and accounts of defendant. Nor have
they shown that they otherwise complied with the provisions of
the Act.

That leaves the various motions to strike and the motions for
sanctions. The court denies the motions to strike by defendant.
In doing so, the court notes the withdrawal by defendant of the
hearsay objections contained in its motions to strike. Because
the remaining bases for defendant's motions to strike are at
least arguably based in the law, the court denies plaintiffs'
motion for sanctions. The court also denies plaintiffs' motions
to strike but in doing so states that it has not considered
anything in defendant's affidavits inconsistent with the
affiants' deposition testimony.

For the foregoing reasons, the court grants summary judgment in
favor of defendant as to both plaintiffs' cases, denies
plaintiffs' motions for summary judgment, and denies all motions
to strike and for Rule 11 sanctions.

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